June 19 (Bloomberg) -- On June 7, Pakistan’s anti-terrorist police burst into a house in the Sohrab Goth suburb of Karachi. Inside, they said, were 10 suicide-bomber jackets, 60 kilograms of explosives, 10 grenades and Taliban militant Naeemur Rahman.

Fayyaz Khan, senior superintendent in the police’s crime investigation department, who led the raid, said the arrest of Rahman, an aide of Taliban Commander Baitullah Mehsud, is part of a daily battle to root out terrorists from Pakistan’s biggest city and prevent a major attack.

“Terrorists have a network here and whenever they get a chance to carry out an attack, they will grab it,” said Khan, “They want to do something major because when something happens here, it creates much more pressure on the government.”

Even as Pakistan’s military drives the Taliban from bases in the Swat Valley, 1,200 kilometers (750 miles) to the north, militants are holing up in Karachi, making it harder to rid the country of Islamic extremists. U.S. officials say the extremists pose a security threat in the nuclear-armed state and aid Muslim insurgents battling NATO forces in neighboring Afghanistan.

Karachi, a city of 18 million people, has two faces. One is the commercial capital, where women are seen in the workforce and in public life, entrepreneurs live in million-dollar homes and jeans-clad teenagers hang out in shopping malls and cafes.

The city is home to the country’s stock exchange, central bank and local headquarters for New York-based Citigroup Inc. and London-and Rotterdam-based Unilever. Karachi contributes more than 70 percent of Pakistan’s tax revenue, according to the local government.

‘Welcome Taliban’

The other face is the rundown warren of narrow streets in districts like Sohrab Goth and Baldia Town, where authorities have little control and walls and bridges are daubed with slogans like “Welcome welcome Taliban” and “Long live Taliban.”

“Karachi has more bombs, dynamite and Kalashnikovs than any other city in Pakistan,” said Fateh Muhammad Burfat, head of criminology at Karachi University.

Investors have been drawn to Karachi after Mayor Mustafa Kamal spent 200 billion rupees ($2.5 billion) in the last three years building bridges, underpasses and roads.

“The Taliban overshadow anything good,” said Farrukh Khan, president of the 175-member Overseas Investors Chamber of Commerce and Industry. “Most investors are taking it as a positive that there’s a consensus in the country to tackle the Taliban head on.”

Stock Gains

The Karachi 100 share index rose 20 percent this year while the currency weakened 2.5 percent. The government projects the economy will grow 2 percent in the year ended June 30, the slowest pace in eight years.

Karachi lures as many as one million job seekers every year, half of whom never return home, city authorities said.

“The problem for Karachi is there is no registration system,” said Burfat. “People are still coming from every corner of the country. Among these, many elements get involved in terrorism.”

The unmapped slums are perfect hiding places for Taliban seeking respite from the fighting, said Arif Hasan, an urban planner and author of “Understanding Karachi.”

“In a city as large as Karachi, anyone can hide,” Hasan said. “Police surveillance is weak and a high level of corruption means any one who has money can easily hide.”

Militants also use the commercial center as a source of money by kidnapping for ransom, robbing banks and trafficking drugs and arms, according to Kamal.

Kidnappings on The Rise

Since the Sept. 11, 2001, attacks in New York, there have been 355 reported kidnappings for ransom in Karachi, compared with 68 in the previous five years, said the Citizens Police Liaison Committee, a volunteer group.

In October 2008, film maker Satish Anand was kidnapped and held for six months until he paid a ransom, police said. A month earlier, Shaukat Afridi, who ran a fleet of oil tankers and supplied NATO forces in Afghanistan, died when his kidnappers blew up the house where he was being held. Wall Street Journal reporter Daniel Pearl was abducted in Karachi and killed in 2002.

Pakistan has suffered more than 25 bombings since the army began its campaign in the Swat Valley seven weeks ago. At least 31 people were killed in political violence in Karachi in the first week of June.

“Hearing gunfire at night everyday has become a habit,” said Ashraf Hussain, Pakistan’s only woman caddy, who travels from the north of the city to the Karachi Golf Club everyday. “I get on the bus every morning fearing how I will get home.”

Meanwhile, Fayyaz Khan and his anti-terrorist team carry out up to three raids a day to try to prevent a major attack.

“It’s a cat and mouse game,” said Khan, 40, who had plastic surgery after a bomb exploded in his hands in 2002. “We have to keep at it. The game is about who is one step ahead.”